Regulation/Reform

Vertical (dis)integration – are you conflicted?

Many financial advisers don’t think they have a conflict of interest, but they might be wrong.

Thanks to the Royal Commission, everybody is talking about vertical integration and in-house conflicts. We explain what this means and highlight four things you can do to manage conflicts effectively.

I’m a financial adviser. Am I conflicted?

Probably. Vertically integrated structures are pretty common in the wealth management industry. It’s not just the big banks that use them.

Do you recommend financial products (including managed accounts) that are issued or operated by your licensee or corporate group?

Do you recommend financial products that will give you, your licensee or your corporate group some type of financial benefit?

If you answered yes to either of these questions, congratulations! You’re conflicted.

So, is my business doomed?

No. Commissioner Hayne toyed with the idea of separating product and advice – known as ‘structural separation’ – but in the end he rejected the idea.

But don’t celebrate just yet.

While Hayne decided that it should be possible for advisers and licensees to manage in-house conflicts effectively, he was damning of the poor consumer outcomes caused by in-house conflicts in recent years.

We expect ASIC to scrutinise vertically integrated structures and in-house product recommendations this year. So advisers and licensees need to be able to demonstrate that they understand the conflict and can manage it effectively.

How do I do that?

You have to place your client’s interests above your own. In most cases, your client will have an existing product. So you should:

Perform a comparative analysis of the pros, cons, fees, risks and benefits of their existing product vs your in-house product; and

Explain why your in-house product is better for your client than their existing product. It’s not enough to just tell the client you have a conflict.

In-house product recommendations will generally be inappropriate if:

The benefits of the in-house product are lower; or

The costs of the in-house product are higher.

The exception to this is if there is a clear justification for your recommendation. For example, if your in-house product addresses a specific client need or objective that the existing product doesn’t.